Europe’s perform inside the US-China semiconductor showdown

ASML Holding NV, the place Van den Brink is now the chief know-how officer, just about owns {the marketplace} for an important piece of equipment needed to provide the brains of each factor that makes trendy life attainable — from autos and smartphones to pc methods, microwaves and airplanes. With the company’s high-end machines churning out chips that might also go into state-of-the-art weapons and artificial intelligence devices, ASML is efficiently being dealt with as important infrastructure for US nationwide security and has change right into a purpose of enterprise espionage for China.

“I on no account anticipated to be the place we’re proper this second,” said Van den Brink.

Over his nearly four decades at the company, ASML has gone from a bit player competing with the likes of Nikon, Canon and Ultratech to the world’s only maker of very high-end semiconductor lithography equipment. Its ascent has made it Europe’s most valuable technology company, with a market capitalization of over $247 billion—more than twice that of its customer Intel Corp. In an industry where devices typically cost $10 million, ASML commands about $180 million for its current top-end machine. And although the chip market has softened recently, ASML is still growing and its long-term outlook seems intact, thanks to the insatiable demand for computing power.

“This is a company that the world can’t exist without,” talked about Jon Bathgate, a fund supervisor at NZS Capital LLC in Denver, which has about $2 billion beneath administration, with ASML as definitely certainly one of its largest holdings. “They’ve acquired a 20-year head start… Investors have clearly realized how obligatory ASML is as a corporation and the way in which powerful it could possibly be to duplicate. It’s a pure monopoly with secular progress winds. That’s distinctive.”

As chips become for geopolitics in the 21st century what oil was in the last one, ASML’s singular success has thrust it squarely in the crosshairs of the intensifying tensions between the US and China. With the US focused on the strategic importance of semiconductors, Presidents Donald Trump and Joe Biden have done everything to ensure that China is a couple of generations behind in chips. No company is more critical to that effort than ASML.

“Most people in industry and government believe that lithography tools are the strongest of the choke points that Western governments have put in place,” talked about Chris Miller, an affiliate professor of worldwide historic previous at Tufts University and the author of Chip War. “Because of that, there’s been intense focus” on ASML.

Cementing the lead

Barred from selling many of its top-end machines in China, and a victim of data thefts, ASML is doing the only thing it can to preserve its almost insurmountable lead: building evermore sophisticated machines. Its next contraption, about the size of an Amsterdam studio apartment, is set to hit markets in 2025. With a price tag of more than $380 million—costlier than a Boeing 787 Dreamliner—it will be capable of etching delicate patterns on silicon wafers smaller than a virus. Already way ahead of rivals, ASML is making sure no one can do what it does for the foreseeable future. Its only real hurdle will be technological limits—building machines that are viable and economical for mass production.

“Even if someone is able to catch up with where we are today, we will make sure that in 10 years we are operating in a completely different paradigm,” Roger Dassen, the company’s chief financial officer, talked about in an interview. “That’s one of many easiest methods we’re capable of protect our place… So you’ll meet up with the place we’re proper this second, nonetheless we’ll seemingly be at a singular place by then.”

In 2019, under pressure from the Trump administration, the Dutch government withheld an export license enabling ASML to sell its top-of-the-line extreme ultraviolet, or EUV, lithography machines to SMIC, China’s main semiconductor foundry. Then, pushed by the Biden administration, the Netherlands tightened the screws further. Its March plan for additional restrictions would rein in exports of more advanced versions of ASML’s older immersion deep ultraviolet, or DUV, lithography machines that can be used with other technologies to make powerful chips for dual civil and military use.

“The business risk for ASML strongly depends on two things: First, whether there will be a ban on a certain DUV equipment type, for example, the most advanced one, or if in the future, there will be a full DUV ban, which would have a much more severe impact,” talked about Julia Hess, enterprise supervisor at Stiftung Neue Verantwortung, a German suppose tank. “Second, how the controls will seemingly be aligned with worldwide places which have competing companies, similar to Japan.”

The China blockade

China is working on building its own semiconductor industry, pouring billions into a chip-building initiative to catch up to the US. Its purchase of older technology has boosted earnings for much of the semiconductor equipment sector. The Asian giant, which a decade ago was a rounding error for ASML, was its third-biggest market behind Taiwan and South Korea in 2022, accounting for about 15% of revenue.

Not being able to sell more powerful equipment in China may become a drag on growth in the future, but for now ASML can barely keep up with its non-China demand, and says the bans have “no material effect.” Its backlog is sort of twice its annual earnings, and its largest purchaser Taiwan Semiconductor Manufacturing Corp. isn’t lowering capital expenditure. Also, the US and Europe have unveiled plans to take a place about $100 billion inside the chip enterprise.

But ASML chief govt officer Peter Wennink nonetheless believes the China blockade is a mistake, saying it may hasten that nation’s efforts to develop its private chip instruments.

“If they cannot get these machines, they will develop them themselves,” he said in an interview. “That will take time, but ultimately they will get there… The more you put them under pressure, the more likely it is that they will double up their efforts.”

Some Chinese individuals and entities have resorted to stealing ASML know-how. The agency, with about 1,500 people in China, disclosed in February {{that a}} former employee had taken some technical knowledge. Last yr, it accused a Beijing-based company, regarded by Chinese officers as certainly one of many nation’s most promising tech ventures, of likely stealing its commerce secrets and techniques and methods.

ASML argued in a 2018 trial in California that Dongfang Jingyuan Electron Ltd. and defunct Silicon Valley company Xtal had been created a month apart in 2014 by a former employee named Zongchang Yu with the particular perform of stealing and transferring its know-how to China. Yu now runs Dongfang in Beijing with ample assist from the Chinese authorities, in line with agency statements and completely different Chinese paperwork.

Protecting IP

The case prompted ASML to protect its psychological property additional fiercely than even sooner than. Its knowledge security workers rose 20% from 2021 to 300. It created a “circle of perception” to train suppliers on cybersecurity risks and keeps tabs on any potential reverse engineering of its machines.

CFO Dassen also points to the futility of attempts to steal the company’s technology. With 5,000 suppliers of everything from software to tin and tungsten and strategic partnerships with companies like Carl Zeiss AG, which makes its critical multilayer mirrors, ASML runs a global ecosystem that would be difficult to match, he notes.

“A lot of ASML’s technology is not on blueprints,” he talked about. “It’s inside the heads of people. And you don’t need merely the blueprints; you need each factor surrounding it and your full present chain. You should assemble an alternate Zeiss, and so forth. That is a colossal job. You’re not talking about months or years. You’re talking a few decade or additional sooner than you probably can replicate one factor like this.”

A peek at how the company—based in a country better known for its canals, bicycles and cannabis-selling coffee shops—has cobbled together a vast, global ecosystem shows why there are no easy workarounds to ASML for China.

“You cannot do it all,” talked about Van den Brink in a written response to questions, alluding to the company’s targeted acquisitions and partnerships. “You should do the problems that you simply simply’re good at. And work with completely different occasions which could be increased in a single factor than you probably can ever be. And then you’ll ship among the finest out of your self and among the finest from these spherical you collectively.”

The technology

Headquartered in the tidy small town of Veldhoven in the Netherlands’s industrial heartland, ASML was all but written off a few decades ago as a bottomless pit for Philips, the Dutch conglomerate from which it was spun off. It struggled in the 1980s to find buyers for its equipment. Its 1995 initial public offering gave it the funds it needed for research, and a breakthrough in DUV lithography machines boosted its market share to nearly 50% in the early 2000s. Then, a moonshot development took it to a whole new level: EUV lithography.

A US government-led EUV consortium had roped in ASML to see how marketable the technology was. Making a huge bet on EUV, something its rivals balked at, the company focused efforts over the next two decades on bringing it out of the lab and into saleable machines. It worked with scientists from three US labs, got equity investments from Intel, TSMC and Samsung Electronics Co. in an unprecedented market collaboration, acquired some key US companies like Cymer and HMI, and signed up hundreds of suppliers across the globe. By 2018, it was ready to mass-produce EUV machines, and by 2021, it owned more than 90% of the $17.1 billion global market for lithography equipment.

EUV lithography uses light of a shorter wavelength to allow chipmakers to cram exponentially higher numbers of transistors into integrated circuits to make powerful chips. The gigantic EUV machine, about the size of a school bus when fully assembled at a customer’s site, takes three to four Boeing 747s to deliver. Weighing 180 metric tonnes, it consists of more than 100,000 parts, 3,000 cables and 40,000 screws, and requires more than 2 kms of hoses.

The kingmaker

As the world’s only maker of such machines, ASML has left its rivals in the dust and shown how difficult it would be for a potential Chinese competitor to emerge.

“It’s not even remotely possible” for anyone to satisfy up with ASML anytime shortly, talked about Douglas O’Laughlin, an analyst at Fabricated Knowledge, an enterprise e-newsletter. “There is the potential for some kind of inflection that we’re not privy to correct now. But the entire people who would know learn the way to do it possibly work for ASML.”

Access to ASML’s most advanced machines has dictated which companies succeed in the industry. Intel, which was slow to adopt EUV machines, fell off its perch as the world’s largest chipmaker last year after holding that spot for close to 30 years. TSMC, which took advantage of the new technology more quickly and is ASML’s biggest customer, is on course for that title this year, according to analysts’ projections, overtaking Samsung and relegating the US company to the third spot.

As of the end of 2022, ASML had delivered 180 EUV systems. It plans to ship 60 EUVs this year, and wants to boost manufacturing capacity so it can almost double the number of the older DUV systems it produces to 600 by 2026. It also wants to build by 2030 as many as 30 of its next machine, dubbed high-NA EUV, which are slated for high-volume chip manufacturing in about two years.

Semiconductor makers are keen to buy this newest machine because many emerging technologies require chips that are more powerful than the ones currently available, said Dylan Patel, chief analyst and founder of SemiAnalysis, an industry research and consulting firm. Features like Apple Inc.’s augmented reality headsets with high-density and long-lasting batteries or servers that could someday run the AI tool ChatGPT-7 are “just not possible with current technology,” he talked about. “high-NA EUV very successfully is perhaps the issue that unlocks that.”

That said, not everyone is convinced the transition to these increasingly complex machines will be smooth. For all the “respect and admiration” he has for ASML, the difficulties chipmakers are liable to encounter are normally not evident inside the agency’s stellar share price enhance, says Timm Schulze-Melander at Redburn in London, who’s the one analyst tracked by Bloomberg with a “promote” rating on ASML shares.

“High-NA EUV has big technical as well as economic challenges that the consensus is not reflecting,” he talked about. “Even for present EUV lithography, it’s worth remembering that the know-how is hard to run in high-volume manufacturing. Despite the hype, proper this second solely three chipmakers — TSMC, Samsung and SK Hynix—presently ship chips made with EUV lithography.”

So how far can ASML economically take its miniaturizing technology? That’s the big question — more than the fear of a Chinese entity catching up with ASML. Even within the company, some worry that it is technology that will eventually limit the company.

“The big long-term risk is that new lithography systems are too costly and unwieldy to produce,” talked about Chip War author Miller. “ASML will ship its high-NA strategies on-line, nonetheless the know-how after that, hyper-NA, continues to be in development. Some ASML workers have speculated it is perhaps too powerful to mass-produce.”

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